Survey Finds Loan Losses Rose Sharply

By RIVA D. ATLAS

Published: October 9, 2002

Loan losses continue to rise at banks and other institutions, mostly because of faltering telecommunications and cable companies, according to a survey by bank regulators released yesterday.

The total amount of sour loans rose by more than a third from a year earlier, the survey found, but only 11 percent were at United States banks. There were much greater increases at foreign banks and other lenders. Loans to telecommunications and cable companies accounted for about three-quarters of the total increase.

Regulators said they did not see an end in sight to the increase in problem loans. But analysts and investors said that severe losses would probably occur at just a handful of banks because most lenders had already sold the loans or added to their reserves if they expected losses.

Bank stocks have fallen sharply the last three weeks, after several companies announced that third-quarter results would be worse than expected partly because of problem loans.

J. P. Morgan Chase, the nation's largest corporate lender, set off the decline last month when it said that write-offs and additions to its reserve against potential losses on loans to companies would rise to $1.4 billion in the third quarter, up from $302 million in the second quarter. Other banks that have warned of rising loan losses include the Bank of New York, Comerica and Northern Trust .

Bank stocks have tumbled more than 12 percent since J. P. Morgan's announcement, according to the Philadelphia Stock Exchange/KBW Banks index. Bank stocks rose 4.3 percent yesterday after the regulators released the report.

''We've had a little bit of hysteria here,'' said Judah Kraushaar, an analyst at Merrill Lynch, referring to the decline in bank shares. In fact, he said, ''most banks will have very modest increases in credit costs.''

Shares of Bank of America, for example, have fallen 16 percent since J. P. Morgan's announcement. But analysts said they did not expect the bank to report a large increase in loan losses for the quarter. The bank had $3.7 billion in loans outstanding to telecommunications companies at the end of the second quarter, making it one of the larger lenders to the industry, although it has probably sold or hedged some of these loans in recent months.

The bank's chief executive, Kenneth D. Lewis, told investors last month at a conference sponsored by Merrill Lynch that write-offs would be about the same in the third quarter as they were in the second quarter.

The survey, which is called the Shared National Credit Review, is conducted annually by the primary bank regulators: the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. This year, it covered $1.9 trillion in loan commitments, including loans of $20 million or more divided among at least three institutions. Of these loans, the amount of classified loans, on which regulators say banks are likely to have at least some loss, rose $39.4 billion, to $157.1 billion. That represents an increase of 34 percent from last year's report. The review is conducted annually in May and June.

The increase, while steep, was smaller than that reported last year. In the 2001 review, problem loans rose 86 percent, or $54.3 billion.

The three regulators also placed $79 billion in loans in the ''special mention'' category. These are loans that are ''in early stages of deterioration'' and bear watching, said David Gibbons, a deputy comptroller for risk in the comptroller's office. The amount of loans in this category increased just 5 percent, after more than doubling the previous year.

''Certainly, the decline in the rate of increase is positive,'' Mr. Gibbons said. But he said he was not expecting a decline in the number of problem loans for several more months.

''We still have a lot of leverage in the system,'' he said. The average corporation has debt that is 6.1 times its cash flow, based on an analysis of Federal Reserve data. That is a greater debt burden than corporations carried during the last two recessions, Mr. Gibbons said.

''I don't think anyone could say with confidence that we are at a peak,'' said Richard Brown, associate director of risk analysis in the division of insurance and research at the F.D.I.C.

Some analysts following bank stocks were encouraged to learn that the rate of growth in problem loans was higher at institutions other than banks, a category that includes hedge funds or special portfolios set up to buy loans. Problem loans increased 68 percent in this group, and 39 percent at foreign banks. In keeping their growth in bad loans at 11 percent, United States banks showed their skill at reducing risk, in part by distributing portions of loans that they make to other institutions.

In addition, ''banks have been very proactive about downsizing their loan books, getting borrowers to refinance their debt in the bond market, and extending maturities for the better borrowers,'' said Steven Wharton, an analyst with Loomis, Sayles & Company.

The problem loans were concentrated in the telecommunications and cable industries, a reflection of the bankruptcies of large companies like WorldCom and Adelphia Communications. Loans to these two industries accounted for about three-quarters of the increase in problem loans this year, the regulators said.

J. P. Morgan said that much of the write-off for the third quarter would be because of troubles in the telecommunications and cable industries. But most large banks have much less exposure in those areas, said Lori Appelbaum, an analyst at Goldman, Sachs.

Telecommunications loans represent 2 percent or less of total loans at most banks, compared with 4 percent of total loans at J. P. Morgan, she said in a recent research report.

Chart: ''Loans in Trouble'' The percentage of large syndicated bank loans that are problematic has risen to the highest level since 1992. Graph tracks percentages from 1992 through 2002. (Sources: Federal Reserve; Office of the Comptroller of the Currency; Federal Deposit Insurance Corporation)

Correction: October 10, 2002, Thursday An article in Business Day yesterday about a survey by regulators that showed an increase in problem loans at banks and other institutions worldwide referred incorrectly to an 11 percent figure. That was the amount of the increase in such loans at United States banks -- not the share of soured loans held by American banks.